RELATED ARTICLES

The rally in biotechnology exchange traded funds is going vertical in early 2012 with the sector’s largest ETF posting a gain of 20% over the past three months.

The $1.5 billion iShares Nasdaq Biotechnology Index Fund (IBB) is breaking out to new all-time highs. The ETF is up 9.6% year to date, compared with a 4.1% gain for the S&P 500, according to Morningstar.

“The upside here is that large pharmas will continue to acquire these companies so long as their own R&D departments are starving. They have tons of cash and a burning desire to add pipeline — which makes almost every publicly-traded biotech a target for someone,” writes Josh Brown at The Reformed Broker.

He notes the biotech ETF has a “very concentrated portfolio” with more than 50% of assets in the top 10 holdings. “This is all very bullish action but investors with a weak risk tolerance need to be careful of course — this ain’t your daddy’s healthcare index fund,” Brown said.

Still, the ETF allows investors to buy a basket of biotech companies and reduce the risk of a single stock blowing up.

“Investors seeking exposure to the highly uncertain but potentially promising prospects of the biotech industry can consider adding iShares Nasdaq Biotechnology to their portfolios as a tactical satellite position to a diversified equity portfolio,” writes Morningstar analyst Robert Goldsborough in a profile of the ETF.

Almost 25% of assets are small-cap names applying innovative techniques to research, develop, and commercialize various drugs targeting certain diseases or therapeutic niches, he added.